in the late 1990s, i read your money or your life, a book about rethinking your relationship with money. i was very interested in it at the time, but set it aside and didn’t do much about it. i did, however, keep complete financial records in the meantime (every penny i received or spent since 1998, from paychecks to nickles in parking meters), so when i started this page in 2001, i was able to plot this graph going all the way back to then.
there’s a lot to the book, and just plotting this graph shouldn’t been seen as the whole of it, but it is a large part. here’s what it means:
one of the messages of the book is that everyone is going to be financially independent at some point in his or her life. for some people, that will be at retirement. for others, at death… if you’re going to get past the need to work for money at some point, why not do it asap, while you still have the youth and health to do what you want? [1]
the authors’ suggestions for getting to financial independence involve taking a close, long look at what you’re spending and why, and whether you’re getting your money’s worth. as a result of just realizing what you’re doing, you:
- reduce your expenses until you’re only spending money on things that bring you fulfillment equal to the amount of energy you had to expend to buy them.
- increase your income as much as you can without doing work you think is wrong or just inappropriate for you.
in other words, the income and expense lines on a graph like this should be splitting further apart until you hit the point at which you’re making enough and spending enough but not more than enough.[2] when that happens, the gap between the two each month is your savings, which should be considered capital. this is where the third line comes in; it’s calculated this way:
($capital * $i) / 12
where $i is the annual interest rate on a no-risk investment vehicle, something that has a modest interest rate but which guarantees not to lose your money.[3] as an example of this, the book holds up long-term u.s. treasury bonds.
so the “investment income” line is what you could make if you took your capital (savings) and invested it. as your expenses come down and your income goes up, the investment income line naturally rises, especially as you get enough money together to actually invest it and start making interest on your investments (and reinvesting that interest).
the magic crossover point comes when the investment income line rises so high that it crosses the expense line. at that point, you’re making enough money each month just from your invested capital that you don’t have to work if you don’t want to.
i’ll post updates of the details of my progress. best of luck with your own goals!
footnotes
1. this doesn’t have to be as materialistic as it may sound. ‘what you want’ could be teaching adults to read or researching alternative fuels. whatever it is, the need to work for money can be a huge obstacle to doing it.
2. the word ‘enough’ is very important to the authors; read the book for all their thoughts about it.
3. they provide a good checklist for the sort of investment(s) that qualify:
- Your capital must produce income.
- Your capital must be absolutely safe.
- Your capital must be in totally liquid investment. you must be able to convert it into cash at a moment’s notice, to handles emergencies.
- Your capital must not be diminished at the time of investment by unnecessary commissions, or other expenses.
- Your income must be absolutely safe.
- Your income must not fluctuate. You must know exactly what your income will be next month, next year and 20 years from now.
- Your income must be payable to you, in cash, at regular intervals.
- Your income must not be diminished by charges, management fees or redemption fees.
- The investment must produce this regular, fixed known income without any further involvement or expense on your part. It must not require maintenance, management, geographic presence or attention due to ‘acts of God’.
jeffcovey.net 
Thanks for writing such a detailed summary of your car expenses–they
were a fresh reminder of how much of a bullet I’m biting just to keep
mine available for use when I decide I need to haul something or when I
want to visit somewhere far away on zero notice. I’ve been turning over
the notion of de-plating my car until both Rebecca and I actually need a
vehicle so that it’s not costing me anything just to keep it. My only
reservation against ditching it entirely is that it fell into my lap at
a time when I desperately needed it, and I’m not so sure I’ll find
something like that again. As it stands, I pay $100 monthly for
insurance, about $30 monthly for gas, and I’ve had to spend about $300
in maintenence on it in the year that I’ve been driving it.
Unfortunately, that’s about 1/6th of my average monthly salary these
days as a full-time student and part-time employee. Being that the UMBC
shuttle runs all over the place locally, including by Lodge Rd., it’s
not really important to me to have full mobility (despite my occasional
wild hair). It costs $95 for six months (~ $17/mo) to put the car into
non-use on my insurance; I think it’s what I’ll do while I’m an
undergraduate so I don’t have to jump through the hoops and fees that
would be entailed by re-registering and replating the car. (I wonder
how you can get a car inspected if you don’t have plates on it–don’t
you have to get an inspection to get the plates?) It just feels like
so much baggage right now, but it’s like the tools I keep at home: when
(not if) I need it, it’s there. It’s so eminently useful for my
lifestyle that a bike is only a good alternative for local, light
traveling. Although I will be investing in a bike that can carry
gear–probably a recumbent, or some panniers. I’m imagining riding the
75 miles to my mom’s in Calvert County. Sounds like a lot more fun, if
a little time-consuming.
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Hi Jeff,
your YOMYL pages have always been interesting. I read that you chose to pay off
your mortgage faster rather than invest the funds. Your concern was the interest
that you were paying out. Have you considered that the interest paid out for your
primary residence is fully tax deductable and factored that into the decision
making process to switch to investing via CD-ladder, etc.?
Also, given the number of friends you’re constantly surrounded by, your worst
case scenario could realistically factor in 1-2 months of no expenses as your
friends help you thus enabling further investment and/or risk taking.
best,
Dave
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hi, the! 🙂
thanks! you’re the third person who has said so recently. it’s nice to know, since i sometimes wonder whether putting this information here benefits or inspires anyone.
the tax deduction for mortgage interest is actually not nearly as good a deal as most people think, and, for most people, doesn’t come near offsetting the benefit of paying down the loan. there’s a good discussion of this in marc eisenson’s “invest in yourself: six secrets to a rich life” (which is otherwise a repetitive and not very worthwhile book, imho). he apparently talks about it even more in “the banker’s secret” (which, according to the feedback on amazon, also spends 200 pages to give 20 pages of information).
i don’t think that unnecessarily relying on my friends to help me through a lean time would be a good expression of friendship toward them. in any event, i’ve put enough cash into guaranteed investments now that i feel secure in taking some small risks. i read a number of books in the past few months and started a new tack this week. i’ll post a news entry on it when i get a chance. sincerely, jeff
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Hi Jeff,
Thank you for your response.
The information on your pages has benefitted me. As with almost every decision
that I’ve seen you make; your ascribing to YOMYL, doing freecycle stuff, linux
activities, charity work, religous devotion and pursuit, occupation selection,
and sharing that information with the world through your own website, the
decision to follow YMOYL demonstrates a fundamental understanding of the
universe and how you interact and affect it. On the Eightfold Path, I’d term
it “Right Understanding” “Right Thought” “Right Occupation” etc. For me, these
pages have put words/phrases into my vocabulary like “Financial Independence”
which I had previously understood but not been able to describe. The YMOYL
information struck a very deep and true chord…it just makes sense.
The two debt types which I advise my friends not to pay off as fast as possible
but instead send the minimum payment towards are primary residence home loans
and student loans. I say this both because of their interest tax deductibility
and their low interest rates. A final reason for not paying them off as quickly
would be, if you can get a greater return on the money that you invest
comparable to sending the same money at the home or student loan.
Thank you for pointing me toward “invest in yourself”.
I also see your point with regard to friendship, and to be clear I wasn’t
advocating not having an emergency funding source. I was merely suggesting
having 4 months rather than 6 months in cases where one lived in a strong
community/society. In terms of cost/benefit, using that 2 months to pay off
a debt more quickly or investing it in a higher return investment would allow
for achieving FI more quickly with minimal/acceptable risk.
Isn’t Needing, Asking for, and Accepting help part of the Buddhist tradition?
I find that stronger friendships are born and maintained by this kind of
interaction with no ill will on anyone’s part.
Congratulations on your successful secure investments. I look forward to
reading more of your thought provoking writings.
your friend,
theDave
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